Yedlin: Alberta's carbon levy doesn't measure up

As Canada’s premiers meet Tuesday in Quebec for a summit on climate change, last week’s EcoFiscal Commission report was likely among the required advance readings.

Premier Jim Prentice will not be in Quebec, but he should find time to read the report, which, among its conclusions, finds Alberta needs to up its game if it wants to be serious — or be taken seriously — about reducing greenhouse gas emissions.

The $15 per tonne carbon levy that every Alberta premier has touted since its inception in 2007 is anything but robust. The Alberta Specified Gas Emitters Regulation (SGER) isn’t changing behaviour because it’s not high enough and doesn’t cast a broad enough net.

“It’s not stringent enough to drive reduction or change behaviour or broad enough to be cost effective,” said Chris Ragan, chairman of the EcoFiscal Commission and an associate professor of Economics at McGill University. “The coverage in British Columbia and Quebec is about 80 per cent.”

In 2012, Alberta accounted for 17.5 per cent of Canada’s Gross Domestic Product (GDP), 11.2 per cent of the country’s population and 35.7 per cent of the country’s greenhouse gas emissions. And those emissions are projected to rise another 20 per cent by 2020.

By contrast, Ontario, with 38.6 per cent of the country’s population and accounting for 38.7 per cent of national GDP, was the second largest emitter, at 23.9 per cent.

The difference, of course, is the energy intensive nature of the oilsands — which account for 27 per cent of Alberta’s emissions — and the province’s continued reliance on coal-fired electricity (which made up 14 per cent of emissions) rather than the nuclear and hydro options Ontario has.

The fact Alberta’s level of GHG emissions is high relative to its share of population and GDP is something to think about.

Anyone who thinks the EcoFiscal Commission report was penned by a group of academics whose focus was to convince Canadians a uniform federal carbon tax is the only way to address GHG emissions would be very wrong, not to mention surprised by the recommendations.

While some of us rail against the inefficiency of not having a single securities regulator (guilty!), when it comes to carbon policies to address GHG emissions, the report advocates a province-by-province approach since every provincial economy is different, as are its sources of energy.

Ragan says that as a country we have a strong history of making policy at the provincial level.

It’s a similar argument to what is heard with respect to immigration policy — one size fits all doesn’t work well. In Alberta’s case, the emissions intensity of its primary industry is higher than what is the case in every other province. Yet that isn’t reflected in the SGER structure.

According to the EcoFiscal Commission report, the average price actually paid per tonne in Alberta is 77 cents, not $15 per tonne. Yes, that’s right. Less than a loonie.

That’s because a company only pays $15 per tonne if it produces an extra tonne of carbon and is over the intensity limit. However, if a company produces that extra tonne of carbon and is below the intensity target, it pays nothing. And because the intensity level isn’t difficult to achieve, only a small fraction of emissions are priced.

Contrast that with British Columbia, where the price is $30 per tonne, the amount that is actually paid. With Quebec’s cap-and-trade program, which Ontario signed on to Monday, the average paid is $11 per tonne — $4 a tonne below the set price. The difference is explained by the ability to buy permits.

For the record, B.C. captures $1.2 billion per year from its tax. Quebec is expected to bring in $425 million a year. Alberta comes in third, at $55 million.

The EcoFiscal report’s release follows Natural Resource Minister Greg Rickford’s recent declaration, during a speech at the Calgary Petroleum Club, that a carbon tax won’t happen under the current government’s watch because its impact on the economy would be too great.

One of Rickford’s key talking points was that a carbon tax would decrease the competitiveness of the Canadian economy and raise prices on everything.

As Ragan points out, much depends on what the government would do with the revenues generated by taxing carbon.

“If you put a carbon price in place it will increase the price of carbon-intensive products, which is what it is supposed to do, but what you do with the revenue, then, is crucial,” said Ragan. “You could end up with higher prices for carbon intensive products, but you could still end up with unchanged purchasing power if you chose the option of reducing personal and corporate taxes. The nature and size of the benefits depends on what you do with the revenues.”

Hands up for those in favour of reducing personal and corporate taxes.

During his hour-long presentation at the CAPP Scotiabank Investment Symposium last week, ARC Financial chief economist Peter Tertzakian opened his presentation with a black and white photo from 1940s England that shows smokestacks belching smoke into the air.

“Those emissions were once a sign of prosperity and industrial might. That is no longer the case,” said Tertzakian.

Given the way many people talk about the issue of pricing carbon, it’s not clear everyone understands this.

The EcoFiscal Commission sponsored a panel discussion at the Toronto Stock Exchange last week to discuss the some of the issues and solutions highlighted in its report. The consensus there was one of the biggest challenges will be convincing businesses and the public that pricing carbon is not a threat to Canada’s future prosperity.

“I think we tend to underestimate the adaptability of the economy in a transformative way,” said Craig Alexander, chief economist for the TD Bank. “It is inevitable Canada will have to put a price on carbon and the question is whether we want to be a leader or a follower. Being a leader makes eminent sense.”

When it comes to Alberta, the big fear remains the impact of a carbon tax on the energy sector — the family business, so to speak.

Ragan said that since the industry is still high on the cost curve, it has to look to innovation that will drive down costs and improve environmental performance to remain competitive.

“Alberta’s longer run challenge is to sell into the developing world. That won’t happen if it remains high on the cost curve,” he said. “What it needs to do is be more innovative than it has been and cleaner than it has been. Because as the world demands cleaner energy, it’s the higher cost and less clean stuff that will get priced out of the market.”

In other words, it’s time to realize that while Alberta was the first jurisdiction to put a price on carbon, what’s in place isn’t good enough.

And while it’s a tough conversation to have during tough economic times, the current downturn won’t last forever. That’s why both industry and government need to make changes that ultimately position Alberta’s energy sector for future growth.

A realistic price on carbon, with broader coverage and revenues recycled to reduce taxes could be the place to start.

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